Support the tax deal

Support the tax deal

Terms of the deal

Here’s what I understand the deal to be:

  • Extended for two years, through December 31, 2012:
    • All 2010 individual income tax rates;
    • 2010 capital gains and dividend rates (15%/5%);
    • Expanded Earned Income Credit is extended for two years
    • Expanded child credit is extended for two years
    • “American Opportunity” (education) tax credit
    • Alternative Minimum Taxes as in the McConnell bill, such that no additional taxpayers face AMT
  • Estate and gift taxes return, with a $5 million per person exemption and a 35% rate. After 2012 they would revert to pre-Bush levels ($1 M / 55%)
  • Full expensing of business investment for all non-property investment for all businesses made between September 8, 2010 and December 31, 2011. 50% expensing for investment made in 2012.
  • Extended unemployment insurance benefits are available through December 31, 2011.
  • Two percent payroll tax credit for 2011 (employee side, replaces the refundable Making Work Pay credit)
  • The smorgasbord of “extender” provisions will run for two years, which is retroactive for 2010 and prospectively for 2011. Details on this are still TBD and are undoubtedly occupying nearly every tax lobbyist in town. (ick)

Analysis

Given a Democratic President, this is the best possible deal that could be reasonably expected. For the next two years, through the remainder of President Obama’s first/only term, tax rates won’t go up on anyone except dead people. (OK, actually their heirs.) That is a total and complete policy win.

With almost no political effort and very little public discussion, capital tax rates aren’t going up. I had expected Congressional Republicans to get two years on all the individual rates but was nervous about the capital tax rates. That is a slightly surprising and complete policy win.

The estate & gift tax deal ends up at the Kyl/Lincoln compromise levels, as most anyone could have guessed for a while. While this isn’t a complete victory, it’s darn good.

The stupid Making Work Pay credit, which the President mislabeled as a tax cut, is now a true payroll tax cut. That’s a marginal improvement.

Unlike many Congressional Republicans, I support extending extended unemployment insurance benefits when the unemployment rate is this high. My back-of-the-envelope suggests that, at a 9.8% rate, between four and nine people who would like a job but cannot find one are getting more generous UI benefits for each person who is getting those same benefits and choosing not to take a job. I’m OK with that ratio.

If I could make two changes to the bill, I’d pay for the increased spending on unemployment insurance with spending cuts in the outyears, and I’d drop the accounting gimmick that doesn’t lower future Social Security obligations to account for the lower payroll tax revenues.

If I could make a third change, I’d drop the business expensing. This provision is a timing shift – it will cause firms to accelerate their medium-to-long-term investment spending into 2011. That’s good for 2011 growth but bad for 2013 and 2014 growth. Since I accept the consensus predictions that we’re in a multi-year slow recovery, that’s not a constructive change. There are times when this makes sense. I don’t think this is one of them, but I’m open to opposing arguments.

And while the small extenders are mostly icky special interest provisions, I’ll hold my nose on these once again, at least for now.

These are, however, relatively minor complaints. This bill is an enormous policy win because the effective changes actually go beyond 2012. Along with the actual changes to law through 2012, this bill should change your expectations of rates beyond 2012. By far the most likely legislative scenario in 2012 is that we repeat this whole scenario and go another 2-4 years without raising taxes. All the arguments that were effective in 2010 will be as effective in 2012, and Congress will already have cast this extension vote once. The tax rates, in effect, become just another “extender” vote. At the moment I’d give 4:1 odds against these rates increasing in 2013.

Compared to what?

I’ll guess that some conservatives will complain that both the rate cuts and the payroll tax cut will have only limited supply-side growth effects because they are temporary. Some may then get sloppy and say “temporary tax cuts don’t create growth.”

Yes, they do, they just don’t create as much growth as permanently lower rates. Permanently lower rates are better than lower rates for two years, but lower rates for two years are better than higher rates beginning 24 days from now.

For many higher income earners the 2% payroll tax cut reduces their average but not their marginal tax rate. I could design a package of income tax rate cuts that I’d prefer to the 2% payroll tax cut, but so what? It’s silly to compare this bill to any one person’s ideal tax policy and say it’s inadequate. This is legislating, not a theoretical tax seminar.

And isn’t letting people keep more of their wages a good idea even if for some it doesn’t have a big supply-side effect?

For those concerned with the deficit increase associated with the UI benefits, I agree that’s a problem. On the upside, the President’s Labor Day proposal to increase highway spending by $50B – $100B just became a lot less likely, as the business expensing provision with which it was packaged is being enacted here.

Recommendation

No-brainer. Support the deal.

(photo credit: FaceMePLS)

19 responses

  1. Pingback: Tweets that mention Support the tax deal | KeithHennessey.com -- Topsy.com

  2. I find it interesting the only mention about deficit concerns refers to UI benefits, whereas the trillions of dollars these tax cuts add to the deficit doesn't seem to be a concern at all. At least it isn't mentioned in this post.

    Why is that?

    I have never understood the argument that says on the one hand the federal debt and the deficit are major problems that is of paramount of importance to solve, while at the same time arguing that deficit busting tax cuts should be enacted as well. Those two positions seems mutually exclusive.

  3. Pingback: Support the tax deal [Keith Hennessey] | DreamInn

  4. I have a question. If individual federal income taxes are cut but the federal government does not reduce spending, the government must increase borrowing to match the reduction in taxes. Since the amount of this increased borrowing is the same as the aggregate reduction in individual federal income taxes, the money transferred from the private sector to the public sector from borrowing is the same as would have been transferred if taxes had not been cut. How does this type of income tax cut stimulate growth?

  5. I agree will your analysis, Keith. Don’t let the perfect be the enemy of the good. This is especially true for the GOP in this case since the left may manage to take down the deal. It’s important that the GOP not help them as that could be the final straw for the Dems for some time.

    Your point about shifting purchases forward is a relevant one but I think accelerated expensing also creates an incentive to make purchases that have been delayed because of the recession. I understand some companies have cash on hand to make purchases but it could also be a test of the lending system. If the lending goes well, that would return confidence in the banking industry, which would be a bonus. The combination of advanced and delayed purchases could also provide enough growth to help fill the gap left by the advanced purchases later.

    As to the motivation for the expensing provision, it looks like another nod from Obama in the direction of the auto industry. Vehicles are about the easiest things for a small business to buy on short notice, with the biggest bang. Could be good for all the unemployed car salesman who don’t tend to be too employable otherwise though. Also, newer vehicles tend to get use less gas and need less maintenance, which provides an operating cost savings. Trade-ins might replenish the used vehicle supply and bring prices down after “cash for clunkers” hurt that market, which could bring even more buyers back to car lots.

    The next easiest buy for small business tax purposes is probably technology items like computers and copiers. Since many companies have been going with old technology longer than planned because of the recession, new equipment could result in a small increase in productivity and we know that increases in productivity are the key to economic expansion.

    It’s unlikely that businesses without customers will do much expanding because of this deal (especially given its temporariness) but some replacing of equipment could still be good for businesses and for the economy. As a complete aside, workers might feel better if they get some new stuff and a morale boost would be welcome right now.

  6. What about the UI for the employer? I'm seeing reportage that indicates employers are getting UI increases in the neck to the degree they couldn't afford to hire if they wanted to…

  7. Pingback: Fiscal Future Daily: Getting the Picture on the Tax Deal; House Democrats Insist on Changes « Choosing the Nation's Fiscal Future

  8. Pingback: How the Left could have won on taxes | KeithHennessey.com

  9. Pingback: How the Left could have won on taxes [Keith Hennessey] | DreamInn

  10. Good conversation here. We linked to this post over at Fiscal Future Daily, our "relentlessly" non-partisan daily blog on national debt issue. We are tracking conversations, blogs and articles about this important subject. Would love to hear comments and viewpoints, check today's post out »» http://bit.ly/eugC7A

  11. Another step taken on the road to American sovereign default.

    What's not to love.

    This has nothing to do with sound free market economics — and everything to do with pony in the poop / Santa Claus "economics".

  12. "No-brainer" — that's the problem.

    There is NO Brain is this sort of "economics'.

    Massively expanding government spending while massively reducing government tax rates is the recipe for a fiscal meltdown and eventual sovereign default.

    I't eating the seed corn, it's burning the kitchen chairs to heat the room, it's killing the milk cow to feed the dogs.

    And it's been the Bush-Obama program — the Establishment GOP / DEM program — for a decade.

    And its the road to national impoverishment of our children and grandchildren.

    And there is not intellectual case to be made for it in all of free market economics.

  13. The Wall Street Journal reports the bill has a price tag of $858 billion. Gee, that number sounds familiar. Oh, now I remember, it's darn near exactly the same amount of the porkulus.

    So let's see. We agree to another $1 Trillion in spending (and borrowing since we ain't got the dough) and we get….the status quo on our taxes. What a great deal – those Republicans are geniuses! And we also get ethanol subsidies, tax breaks for the TV & film industry and motorsports entertainment complexes, well they're just "fun" aren't they? Oh, and of course it wouldn't be a porkulus if it didn't contain several provisions for our perennial "natives", the Indians. Oh and I know neither Republicans nor Democrats would disagree that wool research is the seminal issue of our time, so of course that's in there too. Oh, and Puerto Rican rum.

    I can see the Republicans are all I hoped for and more. And all those hours I spent over the past 1 ½ years working tirelessly to get them elected was worth it if this tax deal is any indication of how they're going to govern. I just hope I can get a lot of that Puerto Rican rum to tide me over till the next election.

  14. I agree with this article, especially at the point that we should extend unemployment benefits. I was excessed last year from the NJ education system because of the school budget cut enacted by Christie. (Yes, my school district was also completely corrupt). All the Republicans applauded this cut highly. Then in return, the Republicans do not want to extend unemployment benefits. Something just doesn't jive in the system for this to occur. And, yes, because of those budget cuts, the NJ education jobs are now non-existent. And, I can say with extreme certainty that most people sitting on unemployment do not want to be! Most people are desperately trying to go back into their field. Unemployment nowhere near provides the financial lifestyle that working people are accostomed to.

  15. Pingback: Responding to conservative critics of the tax deal | KeithHennessey.com

  16. Pingback: Responding to conservative critics of the tax deal [Keith Hennessey] | DreamInn

  17. Pingback: The Tax Deal « Big Citizen

  18. Pingback: Support the tax deal | PowerTowneDistro.com

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